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In brief
In the latest EY CEO Survey from January 2024 (pdf), almost all CEOs – 98% – were planning to alter their strategic investment plans as a result of geopolitical challenges. In recent years, the war in Ukraine, conflict in the Middle East and the reordering of global alliance systems have contributed to heightened geopolitical volatility. And the global elections supercycle in 2024 – in which voters representing more than 50% of the global population will go to the polls – will further elevate geopolitical, policy and regulatory uncertainties. While the global operating environment is never static, this level of geopolitical disruption presents significant challenges to international companies.
Recent events have accelerated a shift toward a multipolar world. But there is no guarantee that this trajectory will continue. Geopolitical disruption and volatility are set to persist, which will also affect global economic growth and inflation. Indeed, there are multiple disruptive forces shaping the global operating environment, including climate change, technological innovation, demographic shifts, and the rising influence of non-state actors. This creates a highly uncertain outlook for the future of globalization.
Navigating such geopolitical uncertainty requires scenario analysis – the systematic exploration of multiple plausible futures. In shaping their company strategy, CEOs should not rely on one set of predictions about the outlook for globalization, as it may prove incorrect. They should instead assess the potential business implications and strategic imperatives of several alternative global operating environments, rather than trying to predict a precise outcome.
In September 2022, as part of the CEO Imperative series, which addresses critical issues and actions to help CEOs reframe the future of their organization, the team in the EY Geostrategic Business Group analyzed geopolitical dynamics to explore what scenarios were likely to emerge in the next five years. Now, a year and a half on, the team has reassessed this analysis. The conclusion? These scenarios have thus far proven resilient and remain plausible futures for the evolution of globalization.
EY analysis revealed two key uncertainties as the primary drivers of the future global operating environment:
Having identified geopolitical relations and countries’ economic policy stances as today’s two key global strategic uncertainties, we focused on four plausible scenarios for the future of globalization based on the intersection of these issues.
From the end of the Cold War in the early 1990s until recently, the global operating environment had been in the quadrant surrounding our Globalization lite scenario. The world shifted toward full globalization in the 1990s and early 2000s, and then began to move inward on the matrix following the 2008-09 Global Financial Crisis. But recent systemic shocks have created significant momentum toward a Cold War II scenario and away from more open globalization. Government responses to the COVID-19 pandemic created an immediate move toward more nationalist, statist policies. And, over time, greater cohesiveness within alliance systems developed. The war in Ukraine produced a dramatic shift toward more distinct blocs in the geopolitical system and more statist economic policies – although the latter are targeted at products and sectors deemed by governments to be strategic for national security, broadly defined.
This distinction points to the primary update to this future of globalization scenario analysis since its launch 18 months ago: the divergent paths of different sectors within the matrix. The more a sector is viewed as strategic by the government, the more governments are seeking to de-risk supply chains and production in that sector. Such economic security policies will push more strategic sectors towards a Cold War II scenario, while less strategic sectors move toward a more Friends first-style operating environment. As a result, we now appear to be entering a new era of selective globalization – or selective deglobalization in some cases.
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Read moreAlthough recent momentum has been toward Cold War II or Friends first, near- and medium-term events could shift the trajectory toward another scenario. More isolationist politicians winning office during the global elections supercycle or a deterioration in alliances could lead to a turn toward self-reliance reigns. And a proliferation of regional trade agreements could precipitate a more broad-based turn toward Friends first. More dramatic shocks – such as a negotiated end to ongoing conflicts and a strong global economic rebound – could even reverse the recent momentum and push the world back toward Globalization lite.
Of course, the future of globalization could fall somewhere between these scenarios. Or globalization could develop in more extreme ways over the next five years. For example, it could be derailed by the world veering toward a large-scale military conflict between great powers (i.e., a “hot war”). There are a variety of current tensions that make such scenarios possible. But we do not assess them to be as likely as the more moderate scenarios detailed here.
Examining our set of four scenarios can help CEOs structure the uncertainty they face, allowing them to analyze and prepare for potential consequences in a more strategic way. To help CEOs and boards assess how they may need to revise their company strategy to adapt to whichever future global operating environment arises, we explore each scenario in more detail below. The scenarios are set out in order, from the most to the least restrictive policy environment for international business.
Chapter 1
A self-reliance reigns world would create a variety of challenges for international companies amid an era of isolationism.
Self-reliance reigns offers a rerun of the 1930s but with greater isolationism. Fraying alliances create a more volatile geopolitical environment; economic and security rationales are conflated; nationalism and populism are ascendent; and many national leaders turn away from alliances and international engagements.
Policymakers are motivated by achieving domestic self-sufficiency and economic security despite the high costs involved. Industrial policy, protectionism and export controls are embraced as antitrust efforts weaken to create national champions in an increasingly broad set of geostrategic sectors – ranging from technology and energy to life sciences and agribusiness.
Isolationist policies result in increased trade volatility, creating a subdued and unstable economic growth outlook. Nationalist policies, including trade barriers, price controls and other restrictive measures, further fuel inflation. Isolationism, weaker technological progress and increased conflict risks limit business investment and productivity growth.
This low-growth, low-innovation environment leads to public frustration with stagnant living standards. This in turn drives further political instability and international isolation. Global trade and capital flows diminish as countries bring supply chains and strategic sectors onshore. Economies fragment into domestically focused enclaves, limiting growth and investment opportunities. While companies in larger markets may have sufficient growth opportunities, those in smaller markets hit walls.
A Self-reliance reigns world would create various challenges for international companies, including:
Chapter 2
In a Cold War II world, companies would have to navigate distinct economic blocs organized around geopolitical alliances.
The Cold War II scenario matches many of the characteristics of the first Cold War. The hardening of alliances and ideological competition creates a world order defined by two distinct blocs. But in this scenario, based on current trends, one bloc is likely to be comprised of the US, the EU and their allies; the other led by China and its allies. There is also a third bloc of largely non-aligned or multi-aligned countries that are under pressure to choose a side. Geopolitical tensions are high and there are more conflicts, including proxy wars between the great powers.
Security, rather than economic rationales, drives domestic policymaking. Governments intervene in supply chains, limit cross-border investments, and impose export controls and further restrictions on doing business with companies in other blocs. Technology is at the center of geopolitical competition.
Governments introduce industrial policies and trade protectionism in an increasing number of geostrategic sectors – spreading from technology and energy to include advanced manufacturing and life sciences. These industrial policies, and reduced antitrust scrutiny, may provide opportunities for larger companies with dominant market positions.
The division of the global economy into blocs constrains private sector innovation and growth opportunities. A focus on self-reliance within blocs generates a weaker global economic rebound and trade barriers between blocs force companies to reorient supply chains, fueling higher levels of inflation. This situation effectively shrinks the size of the global operating environment for companies to markets aligned with their home government.
In a Cold War II world, companies must contend with several key issues:
Chapter 3
In a Friends first world, companies face a combination of challenges and opportunities within a complex geostrategic environment.
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Read moreFriends first is a less familiar geostrategic environment, somewhat reminiscent of the early 1900s. In this scenario, geopolitics is characterized by a complex set of alliances and affinity groupings, which are sometimes institutionalized by trade and investment agreements. Governments prioritize strategic supply chains within their alliances, and companies shift toward “friendshoring” key operations and supplies. Despite these divisions, geopolitical tensions are at manageable levels as governments focus on supporting domestic economic growth.
Policymaking is balanced between economic, security and sustainability rationales. Governments prioritize economic relationships with allied countries, but there are few restrictions on cross-border flows outside of a limited set of strategic sectors, including advanced digital technology, energy and advanced manufacturing.
Liberalized policies and a greater focus on supply chain resilience and operational optimization within alliances drive a moderate global rebound. Friends first policies create technological hubs that support productivity growth within regional hubs, but overall trade barriers limit gains.
CEOs must balance sustainability imperatives and geopolitical pressures with market dynamics when making operational, supply chain and strategic decisions. The relative importance of these considerations varies by sector, but all companies find themselves in a more complicated geostrategic environment.
In a Friends first world, companies face both challenges and opportunities:
Chapter 4
Companies would have a variety of opportunities associated with more open markets – as well as some lingering challenges – in a Globalization lite world.
Globalization lite presents a partial return to the 1990s and early 2000s. Low levels of geopolitical tensions create a more stable and predictable global operating environment for companies. Ideological blocs fade in significance as trade-driven partnerships become more important. International relations and problem-solving for global issues such as climate change become more multilateral.
Economics considerations are given more weight than security rationales in policymaking. Market access and economic growth become more important than geopolitical considerations in governments’ economic policy stance. As a result, governments shift away from the industrial policy and supply chain intervention of the early 2020s in all but the most strategic sectors, such as digital technology.
As global economic growth rebounds, alliances fade in relevance and policy constraints on globalization recede. Stronger globalization reduces trade barriers and revives a focus on technological progress, lowering inflation. Liberalization raises investment and productivity growth and improves living standards.
Companies are able to make operational, supply chain and strategic decisions based largely on market fundamentals – although political risks still shape corporate decision-making in the technology and energy sectors. But this new wave of globalization is moderated by stakeholder capitalism interests. Sustainability is an important consideration in supply chain and strategic decisions, due to both government regulations and stakeholder preference.
Companies would have a variety of opportunities – as well as lingering challenges – in a Globalization lite world:
Chapter 5
CEOs and boards should take three steps to integrate scenario planning into their company strategy.
Any of the four above scenarios are plausible in the medium term, which complicates strategic planning. CEOs need to build more agility into their operations and strategy now, to be ready for whichever way globalization evolves. CEOs and boards should use scenario planning to update their company strategy. There are three steps to implementing such a geostrategy:
CEOs and boards should continue to monitor political risks and other megatrends for opportunities and challenges. They also need to watch geopolitics for signs of what the future of globalization will be. CEOs should proactively scan for these early warning indicators – and quickly shift their strategies accordingly. Various key events and trends in the coming years may indicate which scenario is emerging, including:
CEOs, boards and strategy teams need to assess the business implications of each scenario now to prepare for divergent scenarios in the next five years. They should conduct both a bottom-up assessment at the business unit and functional level and a top-down assessment at the corporate level. We see ten key strategic questions that CEOs should ask themselves and their teams:
Once CEOs have the answers to the questions above, they need to change strategy – taking actions today to enable their company to mitigate the challenges and seize the opportunities that each scenario presents in the coming years.
In some cases, companies may need to transform supply chains to match evolving geopolitical realities. Other companies may need to better incorporate political risk into their acquisition and divestment strategies. And some companies may need to change their entire business model to position themselves for growth in an uncertain geopolitical environment. Companies should prioritize and immediately implement the strategic actions that would build the most agility and robustness across all four scenarios.
Chapter 6
CEOs have a crucial role as advocates for the most optimistic of our scenarios, Globalization lite.
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Read moreGlobalization in the past few decades has brought extraordinary benefits to people across the world. In emerging markets, trade has helped lift billions out of poverty and enabled access to innovative goods and services. In developed markets, standards of living have continued to rise, and the range of goods and services has expanded. Citizens across the world have become more connected by shared ideas, international supply chains, global employers and travel.
There have also been significant downsides. Environmental damage has occurred, particularly where regulation is weak. Labor standards have not been upheld universally. And inequality has grown dramatically within countries when the benefits of globalization are not shared widely. Many governments are now taking action to address these, and other, downsides. And rightly so: globalization must work for all.
However, as our scenarios illustrate, the world is not just turning its back on the disadvantages of globalization. It is becoming increasingly clear, particularly as geopolitical tensions mount, that it is also turning its back on its advantages. This creates significant challenges for international companies. But, more important, the current trajectory of geopolitical relations and economic policy stances now threatens global peace and prosperity.
CEOs and other international business leaders have a crucial role as advocates for the most optimistic of our scenarios, Globalization lite. Companies should continue to develop and leverage relationships with all stakeholders – including policymakers, investors, employees, customers and others – to support policies that spread the benefits of globalization more widely and promote sustainability and long-term value around the world.
Environmental and labor standards should be strong, supply chains need to be resilient to shocks, economic gains should be widely shared, and national security must be protected. But a slide toward protectionism, self-reliance and economic (or even military) conflict will challenge the attainment of all these goals. The open movement of goods, capital, ideas and people across borders makes the world a more harmonious and prosperous place. CEOs should advocate for Globalization lite – a better working world than the one in which they operate today.
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CEOs and boards need to prepare now for the future of globalization. Managing the uncertainty over how geopolitics will evolve in the medium term is a challenge. But CEOs and boards cannot wait for clarity before setting their future strategy. Rather, they need to act now to make strategic decisions that position their company to flourish during the turbulent times ahead.
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Read our September 2024 Geostrategic Analysis for our take on geopolitical developments and the impact of these political risks on international business.
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